The recent softer U.S. consumer inflation readings have had a notable impact on Asian currencies, with most of them rising as a result. This movement was largely driven by the dollar weakening to a one-month low, prompting traders to increase their bets on a potential interest rate cut in September. However, despite this overall trend, some regional units faced challenges due to a combination of soft economic data and ongoing trade tensions, particularly in countries like Japan, China, and Australia.
The dollar index and dollar index futures both fell by 0.2% during Asian trade, following significant losses in the wake of the U.S. consumer price index inflation and core CPI data for April coming in cooler than expected. This led to growing hopes that inflation would continue to cool in the coming months, potentially paving the way for the Federal Reserve to implement interest rate cuts. Traders responded by adjusting their expectations for a 25 basis point cut in September, with the probability of such a move rising to nearly 54% from the previous week’s 49%, according to the CME Fedwatch tool.
In Japan, the USDJPY pair declined by 0.6% to around 154 yen, reflecting the currency’s strength relative to the dollar. Despite this movement, the pair remained significantly higher than levels seen earlier in May, when the Japanese government was rumored to have intervened in the currency markets. The country’s gross domestic product data for the first quarter revealed a sharper contraction than anticipated, raising concerns about the Bank of Japan’s ability to continue raising interest rates in the future.
The Chinese yuan experienced only a slight drop against the U.S. dollar, as trade tensions between China and the U.S. escalated with the imposition of stricter tariffs on key Chinese industries. This development, coupled with upcoming industrial production and retail sales data releases, added to the uncertainty surrounding the Chinese currency. Meanwhile, the Australian dollar saw minimal movement following an unexpected rise in unemployment figures, which tempered expectations of further interest rate hikes by the Reserve Bank. Additionally, trade concerns with China weighed on the Australian dollar, given the country’s significant trade exposure to its neighbor.
Despite the various challenges faced by specific Asian economies, the majority of Asian currencies benefited from a weaker dollar in response to softer U.S. consumer inflation data. While trade tensions and economic uncertainties continue to pose risks to regional currencies, the overall sentiment remains cautiously optimistic as traders assess the potential implications of upcoming data releases and central bank decisions.